Three fundamentals for the week: Traders laser-focused on Fed's favorite inflation figure

• US Consumer Confidence kicks off the week with worries of further deterioration.
• An update on past US GDP growth may also include a downgrade.
• Core PCE, the Fed's preferred gauge of inflation, is set to trigger high volatility. 

An explosive end to May – that is what a key inflation figure promises traders on the last day of the month. After a slow start to the week due to bank holidays in the US and the UK, the cooker pressure will heat up.

US CB Consumer Confidence may point lower

Tuesday, 14:00 GMT. How low can US consumer confidence go? The Conference Board's Consumer Confidence gauge is released on the first full trading day of the week, and is expected to show the fourth consecutive decline. 

Weaker sentiment implies softer spending and, eventually, lower interest rates. However, if confidence deteriorates due to inflation, that is a cause for worry. The devil is in the details. After last month's fall to 97.0 from 103.1 points, some fear another fall could come. 

Lower confidence that is based on lingering inflation fears would boost the US Dollar and hurt other assets, while an improvement in sentiment due to lower inflation expectations would mostly help stocks.  

US GDP to confirm first-quarter weakness

Thursday, 12:30. The first release of US Gross Domestic Product (GDP) disappointed with a meager annualized growth rate of 1.6%. According to the economic calendar, a small downgrade to 1.4% is on the cards. A weaker figure would boost hopes of a rate cut, while stronger data would push them back.

However, like in consumer confidence, the components matter. Expansion in Q1 was dragged down by a higher inflation component, which will now be revised. Any softer read of inflation would boost markets – even if it is a data point for the quarter that ended two months ago. 

Another factor to watch is Personal Consumption. The US economy is powered by consumption, and as long as this figure remains robust, there will be no real recession worry. 

Core PCE is left, right, and center for investors

Friday, 12:30 GMT. The best is kept for last – markets move by the tune of the Federal Reserve, which focuses on inflation and this critical read. The core Personal Consumption Expenditure (core PCE) Price Index is set to show a monthly increase of 0.3% MoM in April, but some expect it to be lower. 

The core Consumer Price Index (core CPI) showed that underlying inflation moderated in April. While the CPI report is published before the PCE one, the Fed's focus on the latter gives it significant weight. 

If core PCE MoM hits 0.3%, some will look for the next decimal point – with such high sensitivity for interest rates, there is a difference between 0.26% and 0.34%, which are both rounded to 0.3%. 

The yearly figure is also of interest. The Fed's targets 2% core PCE YoY, and as of March, it stood at 2.8%. Markets expect it to remain steady in April, so any drop would be welcomed.
 

Core PCE YoY. Source: FXStreet

I expect somewhat weaker core PCE figures, boosting stocks and Gold, while pushing the US Dollar and yields lower. Investors seem to be eager for any piece of good news on the inflation front.

Final thoughts

It is essential to note that the last day of the week is also the last day of the month – which means additional volatility as money managers rush to adjust their portfolios. Trade with care.